I often write on Quora.com, where I am the most viewed writer on financial matters, with over 251.2 million views in recent years.
In the answers below I focused on the following topics:
- I was asked “if you could travel back 25 years with $10000 what would you do with it?”. I answer this question by asking if hindsight is easy in a world of uncertainty.
- How many years does it take to become a millionaire by investing? More specifically, I look at different scenarios to illustrate a wider point about investing returns.
- Do professional athletes deserve their salaries? Or is it the wrong question to begin with considering life isn’t fair?
- Why do so many people get intimidated by the topic of investing? Is it because investing seems technical or another reason such as the complicated way most financial experts speak?
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That would be great because we could have:
- Bought Microsoft stocks and then sold near the top of the 2000 market top
- Went into Chinese and other emerging stocks from 2000–2006
- Dipped our toes into Oil-related investments as well as commodities
- Sold everything before this event and go into cash briefly and especially short-term US Treasury bonds:
- Then bought stocks in the US in March 2009 at the bottom.
- Hold them for years before late 2018. Then sell them and a few months later buy them back
- Buy the FAANG stocks at a similar time
- Sell everything after this event. Or not right after the event, as stocks were soaring, but right at the moment when the panic began
- Go into cash and short-term Treasuries
- Back buy stocks again a few months later
- Hold them during October/November when many people were panicking about the election and second lockdowns. Doing this would have ensured we got access to the huge increases in November 2020
- Held onto now
Nobody could do this. We are always acting on imperfect inflation.
So many unknown variables. So many unexpected events. So much randomness in terms of how assets perform.
Therefore, the best thing to do with $1,000 25 years ago would have just been to invest it in a diversified portfolio, mainly tracking the market.
Deal with the ups and downs, and add to the money on a regular basis.
Very boring I know, but it is effective and also good for your sanity.
It depends on the following factors:
- How much you put in
- When you put it in. Putting in $100,000 as a lump sum at the beginning is different to putting in $100,000 gradually over a period of time
- How the markets perform. Seldom do markets perform at their historical averages. They usually average above that, or below that, in any given historical period, and it is very difficult in advance to know which periods will be better or worse. In the last 12–13 years, the averages have been higher in the case of US indexes at least, and lower for some emerging markets. Likewise, certain periods like 82–99 produced returns as high as 16%, with other periods being completely stagnant (0% returns).
- Also your behaviour in the middle like if you panic sell during crashes, which clearly makes it more difficult, as you need to sometimes pay taxes and accept the loss.
Let’s give some scenarios
Person 1: Invests $100,000 as a lump sum and gets 10% per year on average (the approximate average return of the S&P500 from 1945). It would take over 24 years to become a millionaire if they don’t add money.
If they add $1,000 a month and get the same returns, the threshold will be reached in 16–17 years.
In reality though, people won’t get a stable, constant return.
So let’s look at another example:
- Invests $100,000
- + $1,000 a month
- Gets 0% in the first 5 years and then 17% for the next few years.
That person will reach the millstone after about 15.5 years.
- Invests $100,000
- + $1,000 a month
- Gets 17% for the first 5 years and then 2% for the next few years
That person has to wait over 30 years to reach the milestone. double the first person.
The reason is that he/she has received the higher returns during a period in which the account is worth less.
If you put in a one-off lump sum and never add to it, you will get to the $1m mark with higher returns as quickly as possible.
If you are a monthly investor, or put in both a lump sum and monthly amount, you will benefit from a period of lower returns, followed by better returns later on.
The bottom line is we can’t predict the markets, so worrying about it is pointless.
Best to just control what is within your control, such as how much you invest to begin with, and how long you invest for.
The market doesn’t care about fairness. These two horses are neck and neck……yet one will win millions more in some races:
It is possible to win millions more prize money, which can mean hundreds of percentage points, for being 0.00001% better than the horse in second place.
Likewise, sometimes the difference between millions in football is millimetres….when a ball almost crosses the line:
Even the difference between making professional or not can be small. I am sure there are many players who would have made it without injuries and bad luck, but that is life.
Deep down, people don’t care that much about fairness either, if you look at actions rather than words.
If you are like most people, you don’t buy two or three books from an author if you have found out they are disabled or from a minority.
Likewise, most people who complain about Amazon and taxes will just shop on them hours after complaining about it!
People have different opinions as well. Some would say they don’t deserve it as much as those in the medical profession.
Others would say that only a tiny fraction make a lot. If you are the number 150 in the world in tennis, you are making hardly any money, even though the number one can make $100m+ a year.
In fact, you might be a part-timer and need to have another job. In most industries you are rich if you are the 150th best in the world.
Even the 150th best used car salesman in the world probably earns $1m+ a year.
Nobody can be proved right or wrong, as these are just subjective opinions.
That is why moralizing is pointless. Those who succeed often get rid of idealism and realize the world isn’t fair.
I have seen the same in business. Some people can’t deal with the fact that small 1% improvements can yield such huge results.
It doesn’t seem fair to some people that a slightly better person can in one niche area can make ten times more than another person.
Others are just pragmatic about it.
It isn’t just investing. Most people find topics outside their area of expertise intimidating.
I might find medicine and health intimidating because there are 1,001 different views online.
Doctor A might have a completely different view to Doctor B, and you have a lot of self interests in the food and beverage industry who lobby.
The same is true in law and yes investments. There are so-many different views, online and offline, and people who haven’t done the needed reading feel it is intimating.
In addition to that, some investment professionals do speak in a language which other people can’t understand.
In the UK we often accuse politicians of living in “the Westminster Bubble”, and thinking that the public understands:
Finance and investments has its own equivalent of the Westminster Bubble.
In other words, a group of people who care about issues that nobody else does, and speaking in a language that few understands.
It is imperative that those who know about investments speak in a language that others can understand.
That is because just like health, learning about financial management and investing is essential because:
- It is one of the few free lunches if we are smart about it. Two people could earn the same in a lifetime in terms of earnings/salary, yet one person could end up in debt and another a millionaire, due to how they manage their finances
- Many friendships and relationships collapse due to bad financial and investment management.
- It is human nature to procrastinate, especially relating to issues that are outside our area of expertise.
- Long-term, people can earn more from assets than their salary. It just takes time to build up
- These days, there are so many distractions and ways we can waste our money, and advertisers have become more sophisticated in targeting people. Paying on cards and with a touch of a button online has only made the issue worse.
- People who are confused about investing and money often either spend it all, or put 100% of their assets in illiquid vehicles like businesses and property. This causes a problem if a black swan event happens like COVID-19. The last year has revealed many people who are wealthy on paper are struggling, like owners of some restaurants, bars and property portfolios. If you can’t sell a percentage of these assets in a crisis quickly, you could be in trouble.
- There is a lot of misinformation out there that investing is only for “the rich”. That might have been the case a few generations ago, but things have changed.
- People could rely on their employer to invest before through company pensions. Few are in this situation today.
- We are all living longer and will need to invest more for retirement.
- Inheritances are getting bigger, so plenty of people will wake up with new fortunes and need to know what they are doing.
- With new taxes coming due to the pandemic and associated lockdowns, people need to plan properly, as these rules and changes will continue over the next ten years.
- As interest and bonds rates are close to 0%, and therefore below the rate of inflation, the indirect losses from not taking action are huge. If you lose 2% to inflation every year for 12–13 years (like has happened since 2008 in many questions), that is an indirect loss of about 30% if you compound it. Yet most people don’t process it that way.
In a sentence, learning about how money works or outsourcing it to somebody who does, makes your life easier.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 251.2 million answers views on Quora.com and a widely sold book on Amazon
In the answer below , taken from my online Quora.com answers, I spoke about the following issues and topics:
- I was asked “how do I start saving without compromising with the standard of life”? I offer plenty of tips in response to this question.
- What are the main causes of people getting into debt? Is it bad education, habits or mindset?
- What are the benefits of living in a third world country? Considering some people even define third world as meaning a country that is not completely developed (such as mid-income countries), I offer many positive aspects associated with living in developing or even very poor countries.
- Is there really a way to get easy money? I especially look at how everybody gets some good, and bad, luck. How can we take advantage of any luck which is afforded to us?
- What subjects do people get more interested in once they retire? Spending more time with kids, traveling, previously neglected hobbies or something else?
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